Technology has disrupted many industries over the past 20 years. It was only a matter of time before it upended the financial advisory business.
In an era where people seemingly spend more time with their friends online than in person, it should come as no surprise that many investors choose to communicate with a computer screen rather than an actual person for financial advice. Human financial advisers have much to fear from these new players, affectionately — or derisively — called robo advisers.
While the old model of the sole practitioner with a book of about 100 clients will probably disappear within 10 years, advisers willing to adapt by embracing new technology and changing their value propositions may be able to flourish.
The key players in the new arena of online investment-management websites include Betterment, Wealthfront and FutureAdvisor. On these sites, people input financial information such as how many assets they have, their goals and their risk tolerance. The computer throws it into an algorithm and puts the money say, into a portfolio of low-risk stock or bond ETFs. The companies are typically more cost-effective than humans, charging between 15 and 35 basis points. They also claim to be more efficient at investment management.
Is Robo Touch Better?
Dan Egan, Betterment’s director of behavioral finance and investing, says that humans have emotional attachments tied up in investments. If you take the human element out and do the job systematically, some tasks — such as rebalancing during a market downturn or correctly timing when to harvest tax losses — become easier.
“We are constantly monitoring the portfolio to improve your returns,” said Egan. “The algorithm is run multiple times during market hours to find the most beneficial time to trade. To achieve the same efficiency, a human being would have to sit there monitoring the accounts 24 hours a day.”
The firm, which began taking clients four years ago, has more than $710 million under management.
“Most advisers are buggy-whip manufacturers in an era of automobiles,” said Ric Edelman, best-selling author, chairman and chief executive officer of Edelman Financial Services. “Advisers who provide only investment services are under significant competition from this new technology. They’re becoming obsolete and are either unaware or in denial.”
The consensus among experts is that advisers need to embrace and stay current with the new technology. Edelman’s firm, which manages $13.5 billion, created its own robo adviser; but he says that to survive, advisers have to provide a broader array of services, such as insurance, estate planning and college planning.
“At a certain level of assets, like a few hundred thousand dollars, you really want to start talking to somebody,” said Doug Wolford, president and chief operating officer of Convergent Wealth Advisors, a Washington, D.C., firm. While he doesn’t consider his company, which manages $8.5 billion and requires clients to have a minimum of $1 million, to be competing against the robo advisers, he says that advisers need to educate themselves about new technology.
Fusing Both Approaches
Bill Harris, chief executive officer of Personal Capital, is finding a way to combine the software aspect of the robo adviser with the personal relationship of a human adviser. Personal Capital offers two services: free software that collects all your financial information and makes it available on phones, tablets and now Google’s (NASDAQ:GOOGL) smartwatch; and human financial advisers for in-depth financial planning.
“Most advisers don’t do planning at all,” said Harris. “They ask five or six questions about risk tolerance, then put you in a prepackaged portfolio. We grab all that data, and then we do high-level financial planning, portfolio maintenance and tax harvesting.”
Harris, former chief executive officer of both Intuit (INTU) and eBay’s (EBAY) PayPal, says that in two years, Personal Capital gained half a million registered users, and the software tracks $1 billion of assets. It has converted enough of the users that it now manages $650 million of client assets.
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This is from an Investor’s Business Daily Special Report. For the full report go to Financial Advisers’ Guide — Making Connections.